The Importance of Site Selection for Cannabis Businesses

It is no secret that the demand for medical cannabis in New Jersey has grown exponentially since Governor Phil Murphy took office in January 2018. One of his first actions, Executive Order 6, required a complete review and overhaul of the state’s medical cannabis policy and operations, leading to a number of regulatory actions. The governor also signed into law the Jake Honig Compassionate Use Medical Cannabis Act (P.L. 2019, c. 153). In their totality, these steps greatly expanded legal access to medical cannabis.

While the patient demand has increased by 300%, there has been a significant lag in new vertically integrated and stand-alone cultivating, processing, and dispensing facilities becoming operational. New Jersey voters will also be deciding this November whether to authorize cannabis for adult use, which, if approved, would present the need for even larger industry expansion.

The potential for rapid development in the New Jersey cannabis industry has many cannabis entities, investors, and entrepreneurs considering ways to get head starts on their potential competition. One of the first questions any potential licensee must address is, “Where will the business be located?” This article will look at some of the ways to answer that question and how those answers will be impacted by New Jersey’s complex environmental and land use laws.

The ‘What’ and ‘Where’ of Site Selection

Site control is paramount when considering any type of cannabis facility. The most recent New Jersey Department of Health Request for Applications (RFA) in 2019 made evidence of site control and support of the local community mandatory elements of the application process, which required proof of lease or ownership, approval of the entity by the local governing body, and either confirmation by the town or analysis supplied by the applicant that the location chosen is in compliance with all local codes and ordinances and outside of a drug-free school zone. Those with sites already in possession were well-positioned to respond.

It should be anticipated that any future RFA under the medical cannabis program or an application for a commercial license (should adult use be legalized) will have a site control requirement. Thus, site selection is critically important, and businesses contemplating entering the New Jersey cannabis market should already be engaging this process.

The location and acquisition of a site will be dependent primarily on the type of operations that will occur at the facility. For example, a vertically integrated medical cannabis facility (cultivating/processing/dispensing) requires a large footprint but also has significant infrastructure needs and requires ease of access for patients and caregivers. By comparison, an entity looking solely to dispense medical marijuana may desire a storefront, while a processing licensee may need a more industrial space. Each one of these entities will also need to address the state’s licensing requirements for security, patient and employee safety, and other criteria specific to the business’ function.

To complicate matters further, local control over the issue of siting cannabis businesses is an important factor in the selection process. This is where a business’ operational need will intersect with the applicable land use and zoning laws, regulations, and ordinances.

Some municipalities have addressed head-on the issue of siting medical cannabis facilities. For example, the City of Hoboken zoning ordinance allows medical cannabis dispensaries in commercial and industrial zone districts. (Ord. of City of Hoboken, Art. IX, s. 196-33.1.) Hoboken limits one dispensary per zone district. The City of Trenton permits “[a]ny business duly licensed by the State of New Jersey to conduct legal medical marijuana operations” in various redevelopment plan areas within the city. (Ord. of City of Trenton, No. 18-48.) This comprises all state licensed medical marijuana operations, including manufacturing, cultivation, processing, distribution, and dispensing.

Conversely, some municipalities have prohibited all cannabis operations. These include, but are not limited to, the Township of Freehold (Ord. of Twp. of Freehold, Art. XII, s. 190-117), Borough of Oceanport (Ord. of Borough of Oceanport, Art. VI, s. 390-31.3), and Township of Brick (Ord. of Twp. of Brick, Ch. 340, s. 340-4).

Cannabis businesses must also be cognizant of applicable federal and state laws that establish minimum distances that controlled substances—a category that continues to include cannabis under the federal Controlled Substances Act—must maintain from sensitive uses such as schools and daycare facilities. For instance, a manufacturing or retail cannabis business that is located within 1,000 feet of a school, playground, or public housing facility, or within 100 feet of a youth center or public pool, will run afoul of the federal Drug Free Zones Act, 21 U.S.C. 860, et seq. Additionally, a cannabis retail business that is within 1,000 feet of school property may violate the New Jersey Drug Free Zone Law, N.J.S. 2C:35-7.

Environmental Liabilities May Be Lurking

Restrictive local zoning ordinances, combined with minimum distance requirements and the required infrastructure needs for cannabis operations, will often cause cannabis businesses to select sites that have been historically used for manufacturing, industrial, or heavy commercial purposes. These are the types of locations that are most often implicated in large-scale environmental cleanups. Owning or operating on such a site may give rise to potential environmental liabilities that can be detrimental to a young business, or even to a well-established entity.

For example, New Jersey’s Spill Compensation and Control Act broadly provides for liability for the cleanup of discharges of hazardous substances against “dischargers” and “persons in any way responsible.” N.J.S.A. 58:10-23.11f. This extends to those “even remotely responsible for causing contamination.” In re Kimber Petroleum Corp., 110 N.J. 69, 85 (1988). Under the Spill Act, a landowner that fails to conduct due diligence prior to purchase of property may be responsible for any preexisting contamination. See N.J.A.C. 7:1E-1.6; see also NJ Schools Dev. Auth. v. Marcantuoune, 428 N.J. Super. 546 (2012). Additionally, an owner of property where a discharge has occurred during the time of ownership may be a responsible party even if that landowner is not at fault or had no reason to know of the ongoing discharge. See Marsh v. NJDEP, 152 N.J. 137 (1997). Further, a non-owner that maintains control over property at the time of a discharge may be similarly responsible. See Marcantuoune, 428 N.J. Super. at 559.

The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) provides for liability under federal law for cleanup and removal of hazardous substances against parties that owned or operated contaminated property at the time of the disposal of hazardous substances, persons that arrange for the disposal of hazardous substances, and transporters of hazardous substances. 42 U.S.C. 9607. As defined under CERCLA, hazardous substances include certain materials that may be associated with cannabis and hemp cultivation, such as volatile organic compounds (VOCs) and various pesticides and herbicides. See 42 U.S.C. 9602.

Unwittingly becoming responsible for an environmental cleanup under the Spill Act or CERCLA can be an oversight that costs hundreds of thousands or even millions of dollars. The years-long litigations that often coincide with environmental cleanups may cost even more, and many businesses have gone bankrupt as a result. For these reasons, when considering site locations, all businesses—especially cannabis businesses, which often have limited start-up capital—must be aware of due diligence obligations and potential environmental liabilities. Additionally, as zoning requirements and other limitations, in many instances, restrict cannabis businesses to properties that have historical manufacturing and industrial uses, cannabis businesses must be especially aware of these obligations and potential liabilities.

Conclusion

With the increased demand for medical cannabis and the potential for adult use on the horizon, New Jersey has come into focus for those seeking to enter the cannabis industry or expand their operations. With opportunity also comes risk, much of which can be mitigated through planning and due diligence. This is particularly true regarding the siting of the operation. It is never too early to start identifying potential locations due to the business needs, governmental regulations, and environmental concerns that exist. Early action and securing a site that meets the many items addressed above may be the difference between becoming an active licensee or waiting on the sidelines.

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Reprinted with permission from the June 29, 2020 issue of the New Jersey Law Journal. © 2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. For information, contact 877-257-3382 or reprints@alm.com or visit www.almreprints.com.